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What percentage of your net worth should your boat represent?

Discussion in 'General Yachting Discussion' started by SMR-PILOT, Aug 14, 2015.

  1. SMR-PILOT

    SMR-PILOT Member

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    This is just something that has me curious, and I know it´s a very broad subject that will probably have thousands of different points of view. But I´ve always asked myself if I irresponsibly spent too much on my boat, or if I could just spend more money on a better boat and not be making a poor life choice. For Example, my boat is worth about 10% of my net worth, and I have no idea how that compares to the average boater population. One thing I think most of us have in common is that we always want to have a better or bigger boat, I guess the best boat you can actually afford. Every time I´ve gone searching for a boat, I see all these bank repos and stuff, that just obviously shows your that there are plenty of financially irrresponisble people out there. I started out with a 17 foot whaler, then a 24 foot donzi, then a 31 ocean master, then a 54 footer, then 66 footer, now I want a 80-90 foot boat, but I may be getting ahead of my finances (or not), maybe getting up to 20% is still prudent? I guess I just would like to hear different points of view, out of curiosity.
  2. olderboater

    olderboater Senior Member

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    I don't think you can look at it as percentage of net worth. There are so many factors involved. I look at it as what part of my net worth, of my liquid assets, can I afford to part with and still be comfortable. On top of that I must be able to afford the annual costs.

    Second is an individual's risk and debt tolerance. We're surprisingly conservative and the idea of assuming a great deal of debt on a boat, betting on future income, is not something I could ever be comfortable with.

    I would rather have a 17 foot Whaler and not worry about the cost or expense than a larger boat and stress.

    A boat isn't a financial investment. To me it's got to be paid for from disposable assets or income.
  3. K1W1

    K1W1 Senior Member

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    My thoughts exactly apart from the brand of boat:)
  4. bernd1972

    bernd1972 Senior Member

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    It´s all reasonable as long as it´s important enough to you and you still own and can afford the boat. It becomes unhealthy if the boat owns you... ;)
  5. Capt J

    Capt J Senior Member

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    I agree with the above sentiments, but figure a boat should be 10% or less, 5% would be more comfortable. Those same figures should be how much the maintainence eats into your annual income 10% or less of it. A boat is an agreed upon expense, not really an asset as it depreciates so much.
  6. RER

    RER Senior Member

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    Boats can often be more of an expense than an asset. In the case of a leveraged or financed vessel, what it's worth is secondary - only the equity would translate to net worth and even then it could possibly be offset by expenses. Maybe a better question would be how much of one's net worth should be spent on a boat.
  7. NYCAP123

    NYCAP123 Senior Member

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    % of net worth is a hard way to figure a depreciating asset, whether that be a boat, a car, an Rv or anything similar. The consideration should be whether you can afford the expense and the loss, especially if the value of the boat gets slashed drastically as happened in 2008 and for a period of every other decade I can think of since the 1960's. As the economy heats up people tend to think about the first part of that only (affording the payments), while forgetting the second (if the value of the boat gets slashed drastically). If you've got a $500,000 boat and lose your job at the same time the value of the boat goes to $200,000 can you handle it? Remember, it's a toy. Never risk your future on a toy.
  8. bernd1972

    bernd1972 Senior Member

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    Obviuosly, to a certain degree it depends on whether you consider a boat a hobby, your only passion or your only possible way of life. You can afford a boat if spending the expenses for the next 5 years doesn´t hurt you and you don´t have to think about resale value. It may stilll be some serious money to you, but it shouldn´t cost your sleep or affect your life in a way that you seriously have to cut down expenses on other things. Don´t think of a boat as an asset. Consider the money gone. It´s fine if you get a good amount back if you sell the boat after some years, but don´t include that money into your future financial planning until the boat is sold again.

    Giving a percentage of your own wealth is difficult. If you live on your retirement savings staying below 10-15% is reasonable even if boating is the most important thing in your life. Of course 10% is quite comfortable but that´s the difference between beeing well of an really wealthy. But if you´re still active in your business and earning well even 20% of your wealth for a boat is nothing scary. If youre so weathy that you can´t kill that fortune with normal living within your lifetime it becomes different again.

    Giving a reasonable percentage is almost impossible without knowing your personal and family sutiation, your future plans wour wealth and income. But we won´t ask you about that. But if you want to be allways on the safe side 10-15% is a good guideline.
    Last edited: Aug 15, 2015
  9. SMR-PILOT

    SMR-PILOT Member

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    Thanks for your reply. That´s the type of comment I was hoping for. There are too many variables and points of views when it comes to how much people spend on boats.
  10. SMR-PILOT

    SMR-PILOT Member

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    That´s excatly right, that would have been a better way to make the question. A boat is obviously an expense and I would never consider it an asset. Just wanted to see different opinions on the subject.
  11. joolkano

    joolkano New Member

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    My thoughts on this is whatever amount you plan on spending on a boat (purchase cost, financing cost, operating and maintenance costs) look to acquire an equivalent cash flowing asset that you can use to off-set all those costs.

    For example, if you have the cash to acquire a $1 million dollar boat, instead of buying it all cash, put down 30% and finance the balance. Then use the cash you have left over ($700k) to acquire a cash flowing asset, in this example a small apartment building.

    If your yearly finance payment on the boat comes to $85k a year and your apartment building, let's say has an 8% net income yearly (assuming no mortgage on it) that's $56k you can use to off-set your boat finance cost.

    So back to your question, I wouldn't look at it from the point of percentage of your net worth. If you have an equivalent appreciating and cash flowing asset that helps you off-set your boat costs, your net worth should remain intact.
  12. olderboater

    olderboater Senior Member

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    We're far too conservative to follow that plan. There are too many pitfalls in it, from my perspective. Words like "appreciating and cash flowing asset." One thinks but never knows that will happen. Look at 2008-2009 and the rapid fall in values of many assets.

    One other problem I see is that the income is taxable and the interest may or may not be deductible depending on whether you can qualify it as a second home. If you can then ok, perhaps you can make greater income than the interest.

    However, if the interest on the boat isn't deductible (you already have a second home or your home mortgages exceed the allowable limit) then you have a very difficult time making the math happen. Now you have 8% income reduced by taxes to under 5% depending on your state. That versus a mortgage of just over 4%. That spread of less than 1% doesn't justify the risk to me.

    One other flaw I see in the "net worth should remain the same" theory. The cost of maintaining and operating the boat. This is where you'd hope to use income on other assets to cover this. However, if that income is already marked for a mortgage, then this can cause your net worth to decrease. In all likelihood you have enough income producing assets to offset that.

    But back to your 8% income theory, that, after taxes, may not cover your operating and maintenance costs of a boat, but definitely can't cover a boat mortgage plus those other costs.

    Now regardless of any of the above calculations, the fact is that if you buy a yacht your net worth will end up as less than it would without that purchase. At the least you lose the opportunity value of some funds.

    The decision to buy a boat is non-financial. Then you simply figure out the finances of affording it. How much one can afford isn't a simple percentage of worth. It's based on one's entire financial picture. The word of caution I'd state though is that one should not stretch themselves thin for a boat (get a smaller one instead) and any plan should not assume the best. Don't assume the stock market will rise or your rental property won't need major expenditures and don't assume the boat won't need engines rebuilt. It's recreation and pleasure and if it causes you to stress over the cost then that would seem to me to greatly distract from the pleasure.
  13. bernd1972

    bernd1972 Senior Member

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    Dear Joolkano,
    your concept sounds more like a strategy to sell someone a mortgage on the boat than a serious strategy to keep the costs for the boat low. If you can afford a boat you have at least one talent that allows you to make enough money to do so or you inherited a good amount. However, you´ll still be able to make money with investment strategies you understand or by using your qualifications. So why making debts for something you can simply buy and pay for?
    If you need those sell-and-lease-back-games the boat is too big for you and if you don´t need them why bother with these games and take additional risks?
    It can give sense if, at some point, you´re short on cash and need to throw some extra money into your business, but making it a strategy for covering the expenses of your boat sounds like gambing to me. Sorry.
  14. olderboater

    olderboater Senior Member

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    No, sounds more like a strategy to sell someone some real estate, like "a small apartment building." Joolkano is in real estate, not boat financing...at least to my knowledge.